How Exposed is Sri Lanka to the Iran-Israel Conflict

• According to various news sources, Israel currently employs around 20,000 Sri Lankan workers. Remittances from Israel accounted for 2% of the total remittances received in 2024. Iran hosts only 35 Sri Lankans, rendering its direct remittance channel negligible

The military confrontation between Iran, Israel, and the United States in June 2025 presents yet another external shock to Sri Lanka’s already battered economy, which is slowly recovering from a historically unprecedented economic crisis. The fragile ceasefire announced on 24th  June offers some respite. But the risks of renewed escalation and their economic spillovers remain.

Trade with Iran

Sri Lanka’s direct trade with Iran has contracted sharply in recent years, largely as a result of intensified sanctions. (albeit some indirect trade via Dubai). Exports fell from USD 205 million in 2013 to USD 68 million in 2024, now representing just 0.6% of total exports (average 2020-2024). Tea dominates this limited trade, accounting for 90% of exports to Iran. Even this share has declined:  Iran’s portion of Sri Lanka’s tea exports dropped from 10% in 2010 to 4% by 2024 (in terms of value). It is also worth noting that the tea trade with Iran is supported by a tea for oil barter, which began in 2023 to settle a long standing USD 250 million oil debt the Ceylon Petroleum Corporation owed Iran since 2012. Nonetheless, the future of this arrangement remains uncertain amidst rising regional tensions. 

Direct imports from Iran are now negligible—only USD 2.5 million in 2024 (just 0.01% of total imports), mainly pharmaceuticals, fertilisers, and minor agricultural products. In contrast, Iran supplied almost all of Sri Lanka’s crude oil a decade ago, worth over USD 600 million in 2012, shipping roughly 50,000 barrels per day, accounting for over 90% of the feedstock refined at Sapugaskanda refinery, built in 1969 with Iranian credit and expertise. However, economic sanctions imposed on Iran in 2018 have prompted Colombo to diversify its oil sources by importing crude oil from the UAE and refined oil from Singapore, India, and Malaysia.

Trade with Israel 

Exports to Israel accounted for around 1% of total exports and 0.6% of total imports (average between 2020 and 2024). Unlike with Iran, both exports to and imports from Israel have been increasing. Exports rose from USD 47 million in 2010 to a peak of USD 170 million in 2021, then fell to USD 90 million in 2024. The export basket is heavily skewed to diamonds and tea. Imports from Israel primarily consist of diamonds, machinery, and aircraft parts.

Trade with the Middle East

While many analysts remain sceptical of an outright closure, the Strait of Hormuz remains the most dangerous point of escalation. Approximately 20% of global oil consumption (around 20 million barrels per day) and a quarter of global natural gas trade transit this narrow corridor daily. Following Israel’s strike on Iran on 13th  June, Brent futures rose by 13%,from USD 70.50 per barrel to an intraday peak of USD  78.50, before settling at USD 74.23. Although prices have since fallen to around USD 66 amid the announcement of the 24 June ceasefire, JP Morgan warned that a complete closure of the Strait of Hormuz could have catapulted oil prices to USD 120–130 per barrel. Sri Lanka is therefore particularly vulnerable: the Middle East supplies 12% of Sri Lanka’s total imports, including over 80% of crude oil and natural gas. Although 80% of Sri Lanka’s oil imports now consist of refined oil sourced mainly from Singapore, India, and Malaysia—countries that have diversified their crude supply beyond the Gulf to include the United States and Russia—any disruption to global supply would inevitably translate into higher prices worldwide. 

For example, a 70% increase in oil prices from the pre-conflict USD 70.5 to JP Morgan’s USD 120 benchmark would have added more than USD 2.5 billion to Sri Lanka’s annual import bill, risking a fragile economic recovery.

The closure of the Hormuz Strait will also impact Sri Lanka’s exports. The Middle East is an important export market for Sri Lanka, accounting for nearly 10% of total exports, valued at USD 1.2 billion. Tea is the primary export, making up more than half of the exports to the Middle East, followed by diamonds, coconuts, fabrics, and coir. Notably, 45% of Sri Lanka’s tea exports are destined for the Middle East, valued at around USD 600 million.

Remittances from 

the Middle East

According to various news sources, Israel currently employs around 20,000 Sri Lankan workers. Remittances from Israel accounted for 2% of the total remittances received in 2024. Iran hosts only 35 Sri Lankans, rendering its direct remittance channel negligible. However, the wider Middle East remains a critical source of remittance income for Sri Lanka. More than one million Sri Lankans work across the Gulf, remitting USD 3 billion in 2024, which is equivalent to 46% of the total remittances.  Should the conflict escalate or air travel routes be disrupted, the deployment of new workers may stall, with potentially significant consequences for household incomes and external balances. 

Impact on Tourism

The Middle East is not a significant source of tourism for Sri Lanka, accounting for only 3.5% of arrivals in 2024. Interestingly, Israel and Iran were the largest and second-largest markets for tourists from the Middle East visiting Sri Lanka in 2024, with 24,845 Israelis and 10,858 Iranians, respectively. Nonetheless, the numbers for Israeli tourists have been declining even before the crisis, following warnings issued by the National Security Council of Israel in late 2024 about potential terrorist attacks on popular tourist spots along the Eastern and Southern coasts of the island.

However, what is most concerning is that the region remains strategically vital as Europe’s and North America’s aviation gateway to Sri Lanka. The Gulf’s airspace provides the most direct connection between Europe and South and Southeast Asia. And with Russian and Ukrainian skies already closed due to war, the importance of the region has increased. Sri Lanka’s tourism figures demonstrate how crucial this connectivity is. Europe accounts for nearly half of all arrivals (48.4% in 2024). Gulf airports such as Dubai, Doha, Abu Dhabi, and Sharjah are key departure points for European tourists heading into Colombo, with these ports collectively contributing over 30% of total arrivals into Colombo. Any conflict-related airspace closure over the Gulf would reduce seat capacity, lengthen journey times, increase travel costs, and weaken European visitor flows to distant destinations like Sri Lanka. 

Conclusion 

Sri Lanka’s headline trade with Iran and Israel is small. Yet, its economic interests are still highly exposed to Middle Eastern stability through three critical channels: energy imports, migrant-worker remittances, and aviation links that connect Colombo to Tourists from Europe and North America. Let’s hope the current ceasefire endures and the parties return to the negotiating table; this article has examined only a handful of direct exposures, and a broader escalation destabilising the Middle East would trigger far wider repercussions than those outlined here.

Mathisha Arangala is a Lead Economist at Verité Research and is part of Verité Research’s International Economics Programme.